ABC Money Matters - Do you trust your bank?

You trust your bank. I'm not talking about whether or not you trust your money will still be there tomorrow. But do you trust your bank not to nickel and dime you for every little service it provides? Despite the cries for government help to stay afloat in these harsh economic times, many banks are making out comfortably by sneaky marketing tactics that are boosting profits. This doesn't mean you have to fall victim to these outrageous bank tricks. Here to enlighten us a bit about how banks lure us into paying extra is Ramit Sethi, author of I will teach you to be rich. Ramit, so good to see you again.

Thanks for having me again.

So tell us what's become the new normal as far as how we view banks?

Well, it's new for us to none of us, for us to trust our banks. I don't trust my bank. You don't trust your bank. None of us trust our bank. And that's because these banks have been scamming us with these slimy fees for years. And we're finally starting to realize that there are better alternatives. There are online high interest bank accounts like ING Direct, hsbc, even Schwab for checking. But what's becoming clear is these banks are now offering better service online without us having to pay these huge fees and get paltry interest rates like 0.5%.

So these online banks, we don't even really need a brick and mortar bank. We can do our checking account. We can do everything with these online banks.

Yeah, you can do it all. It's just as safe. You can send your checks in via mail. It's all free, prepaid, everything can be transferred online. It's all free. And you don't have to pay those huge fees that these brick and mortar banks will charge you.

Well, so let's talk a little bit about these sneaky, these sneaky tactics. You call them five shiny marketing tactics that banks use to trick you. And the first one is those teaser rates. Now I'm assuming that's when banks lure you in with a higher interest rate for the first two months.

I hate these. That's exactly what it is. They get you and they say, oh, you're going to get 5%. And then the fine print says for the first two months and if you actually did the math, you would realize on your balance of one or $2,000 that that's just a few dollars. But it tricks people. It makes us think, wow, this is the best deal in the world. What you actually need to focus on the long term. Pick a bank that you want to stick with because after those first shiny two months, it's not really going to matter. It's kind of like dating a really hot model. After a week, the hotness falls away and you're stuck with what's left. So you want to pick a bank that you can stick with for the long term.

You have a conversation with, right?

Yeah, that's right.

Another marketing tactic by banks requiring minimum balances.

Yeah. These banks will tell you that you need to have a minimum thousand dollars to have an account there. Maybe fifteen hundred dollars to get free checking. Sometimes they'll even tell you you need $5,000 minimums you to get certain account levels. Do you think if I have $5,000 I'm going to let it sit around in my checking account? Hell no. Okay. That money is going to an investment account where I'm going to make a lot more money. So with these banks, what's important to know is that they will negotiate. I always talk about negotiating like an Indian. These banks will give you discounted rates if you ask.

All right. And I need you to explain the next one for me because I'm not quite. I understand. Upsells to expensive accounts. What does that mean?

Well, a lot of these banks, they make money from fees, but they also make money from these account fees as well where they're going to try to upsell you to the next and best account that they have. Often they'll give you the most ridiculous benefits. They'll say if you upgrade to this next account, you'll get free money orders and it's only $10.95 a month. Do you think I need money orders from my bank? Give me a break. Okay, what you need with your bank account, it's no fees, okay? No minimums. And you want to have a bank that you can trust and that works for you. You don't need these stupid side benefits.

Gimmicks. Gimmicks. Gimmick.

Exactly.

And this next one, many of us have experienced holding out. Banks are notorious for doing this. Right?

Yeah. You'll go to the bank and you'll say, well I heard this guy on tv, Ramit, and he was telling me that I can get these no fee accounts. And they'll say, well I'm sorry sir, we used to offer those but we don't. Instead we can offer you free checking if you have a minimum thousand dollars. Okay, quickly recognize what they're trying to do. They're going to hold out because they don't want you to get those no fee accounts. Be firm, be polite and say, you know what, I know that you can offer me this account because your competitors are offering it and I'd hate to have to go over there again. You're being polite, but you're being firm. And you say, what can you do to work with me? These banks pay a customer acquisition cost of a few hundred dollars, sometimes over a thousand dollars. So they want you, they want to serve you if you ask them.

So don't fall for that bait and switch. If you're going in for the bait, then you insist on getting it.

That's exactly right. And in fact, I have scripts in chapter two of my book, I Will Teach youh Be Rich. They show you exactly what to say to get those no fee accounts.

Alright, and the marketing tactic by banks bundling a credit card. Why is this not a good idea?

Well, you know, as we know, banks make a ton of money from credit cards. So they're going to try to bundle it in occasionally and say, well, you're getting this account. Sure, I can give you that no fee account. If you open up a credit card, push back. If you didn't go in there specifically for a credit card, then you don't want to walk out with a credit card. Only go in and get what you wanted to get originally.

And let's talk about the thing that annoys everyone the most. These fees. These endless fees. They seem to get them for everything. How do we avoid them?

I hate these fees more than anything else in the world. Maybe. Okay, a couple years ago these banks made $10 billion on overdraft fees alone. Okay, so what happens with these overdraft fees? Let's say you go and you buy something for $30 on your debit card and you only have 28 bucks in your account. Well, you would think the bank would decline the charge. In fact, they will helpfully let it go through. They'll also helpfully charge you 5, 30, 35, $37. Overdraft. In fact, you can trigger multiple overdraft fees in one day. So what you want to do is focus on accounts that are going to be more friendly with you in getting these overdraft fees waived. Of course you want to prevent getting overdraft fees in the first place by automating your accounts the right way.

What about all of those annoying ATM fees? Every time you use an ATM you get charged not only by the bank that you're using your ATM to get money out of, but then sometimes you get a sneaky fee from your own bank.

Yeah, that's another way that they make tons of money. So I rarely recommend specific accounts. But I'm going to tell you about a new account I started using. And I don't make any money referring anyone to this account.

Sure.

This is a Schwab checking account, which I think is actually the best checking account on the market. When you use this card, you can take money out from any atm, and you get all your ATM fees sent back to you. You get them credited back to you. So you will pay no ATM fees no matter where you take money out.

You're kidding. I'm taking notes. I'm writing this down. That's amazing.

Schwab investor checking account. I think it's the best one on the market.

And it's online.

It is.

All right, Ramit, thank you so much for your time and your great advice.

Thanks for having me.